Unsigned Memorandum Prepared in the Bureau of Inter-American Affairs

top secret

Economic Effects of the Defense Mobilization Program1

(For Under Secretary’s Meeting on Monday, October 30, 1950.)2

The general substance of the paper presented by E3 regarding the above subject is fairly well known to everyone who has been reading the newspapers, although the most recent statistical data here may not be available to the public.

There are two aspects of the data in the paper that concern ARA especially: first, continuation of the trends described in the paper would be both advantageous and disadvantageous to Latin America, with the disadvantages exceeding the advantages; second, in connection with some of the elements in the situation the U.S. Government could and should take action.

It seems unnecessary to say that continuing rising prices of raw materials and foodstuffs (coffee and cocoa beans), as shown on page 2, will mean greater dollar income for Latin America; this, in turn, means greater ability to obtain abroad needed capital as well as consumer goods, to build up depleted dollar reserves and thus to strengthen the basic position of their currencies, etc. On the other hand, rising prices also mean greater cost of imported goods, greater pressure on supplies of goods both within the Latin American countries and in the U.S., and, on the whole, greater internal inflation in Latin America. To the extent that the larger income from Latin American [Page 688] exports cannot be used because of our export controls, the effect will be inflationary, since no Latin American country has taken, and it seems doubtful that in the near future any will take, steps to sterilize the excess exchange and mop up the excess local circulating media; this will mean greater pressure against the supply of goods within each country, rising internal prices and wages, higher costs of production, and higher prices charged to foreigners for Latin American exports, thus completing the circle and initiating the process all over again. This “vicious circle” would not be so ominous if we could expect anti-inflationary measures (higher taxes, credit restrictions, etc.) to be adopted by these countries, but the experience during World War II gives us little reason to hope that such salutary devices will be used, or that other beneficent expedients, like price controls, will be successfully employed. Even our plans for sizeable loans for general economic development and for the execution of programs considered vital to our national interests will be inflationary at first, in as much as the increased production that will eventually result will come much later, especially since the effective labor supply in Latin America is somewhat limited and far less mobile than in more highly developed countries. Here again, the inflationary impact of our plans would be greatly reduced in Latin America if counteracting domestic measures could be anticipated. We probably cannot induce these countries to adopt such measures in the near future, but we should, for our own benefit as well as that of the Latin American and other countries, do what we can to minimize the inflationary effects of our actions. One specific thing we can do, it seems to me, is to initiate, at the earliest possible date, price controls and restrictions on wage payments within the United States; this would at least reduce the momentum of the inflationary factors in our economic structure, especially in connection with the “vicious circle” mentioned previously.

The suggestion just made is apparently not wholly in accord with the view of some of our Government’s planners. E’s paper states that “strenuous efforts are being made … to devise control measures which will obviate the large and cumbersome administrative machinery which such controls entail.” As an alternative, reference is made to the recent credit restrictions with respect to installment sales, new housing, and bank lending, and comment is added that “a new tax program is being developed and consideration is being given to a tough wage stabilization policy.” The difficulty, as I see it, is that the measures adopted (credit restrictions primarily) will not be very effective in preventing a rise in prices unless and until the other measures under consideration (higher taxes and wage stabilization) are actually in effect, since the Government will probably be expanding the circulating media faster than the credit restrictions diminish them. For this reason I am rather in accord with E’s view that “there is a [Page 689] serious question as to whether general price controls can be avoided. Consumer incomes will rise very substantially, whereas the amount of goods which will be available for civilian consumption will not increase and will remain at approximately the present level until 1953.” It is these very civilian goods that Latin America, by and large, will desire to buy in increasing quantities as it has more and more dollars at its disposal. It seems difficult to escape the conclusion that not only are price and wage controls inevitable if the economic structures of the U.S. and Latin America are not to be seriously damaged by the operation of the “vicious circle”, but that the longer the delay in putting these controls into effect, the more vicious will the circle become.

The establishment in the U.S. of price and wage controls—I prefer the word “controls” to the “stabilization” used in E’s paper, since I believe a modified form of the forced savings principle proposed by Keynes in World War II should be adopted when wage increases are necessary as a result of price rises, and that stabilization should not mean the maintenance of labor’s purchasing power at its present level—is, then, one of the things which would help Latin America as well as ourselves. Other helpful steps would include the formulation of definite policies by our Government with regard to such matters as export controls, the allocation of goods, procurement of scarce materials and the expansion of production of such materials in other countries. All of these are mentioned on page 4 of E’s paper, but little indication is given of real progress in these important matters, other than references to some of the difficulties involved. Naturally many difficulties arise in connection with the formulation of such policies, but the lack of evident progress to date is discouraging. Even within the Department, a suggested export control policy presented by ARA to E some time ago has apparently not yet been cleared. In other agencies there appears to be similar hesitation; Interior is not sure that the Defense Production Act authorizes it to purchase abroad, and the Munitions Board believes it lacks general authority to make long-term contracts for the procurement of necessary materials. With respect to export controls, it does seem that a departmental policy should be agreed upon without delay; the political importance of this must be obvious. As for Interior’s uncertainty, the Attorney-General has been requested to give an opinion in the matter; in the circumstances perhaps it is only fair that we wait a few days more for the decision to be made. But if a decision does not come within a reasonable time, the Department might consider the advisability of attempting to have a decision expedited through discussion of the matter with NSRB. Similarly, NSRB might be consulted as to the possibility of having the Munitions Board initiate long-term contracts, [Page 690] even to the point of agreeing upon legislation to be requested, if this be necessary.

The Executive branch of our Government has been given a great deal of power in the Defense Production Act and other legislation, and it will be subject to criticism if it does not use that power with a promptness appropriate to the situation we now face. Any additional legislation needed can probably be obtained from the Congress without much difficulty. The fact seems to be that all too little real progress is being made, and meanwhile our economic and political foreign policies continue to be uncertain. In the case of our relations with the Latin American countries, from which we expect so much in the way of raw materials at least, this seems most unfortunate.4

  1. For related documentation, see memorandum by Mr. Miller to Louis J. Halle, November 7, p. 625.
  2. There is no evidence as to whether this paper was distributed for use at the meeting in question.
  3. UM D–116/1, October 27, 1950, not printed. (Lot 53 D 250: Files of the Under Secretary’s Meetings)
  4. According to an unsigned memorandum of the discussion of UM D–116/1 at the Under Secretary’s Meeting held October 30, Mr. Miller emphasized his opinion that the longer the United States waited for a policy decision (on the domestic and foreign allocation problem) the worse off the United States would be but agreed that a decision should not then be made if that meant that a low priority would be given to foreign requirements. Mr. Miller also suggested that experience on that problem gained in World War II should be used. Mr. Webb agreed and asked for further study with this consideration in mind. (UM M–262, Lot 53 D 250, Folder “UM minutes—Memos. No. 3, 214–287”)

    Excerpts from Mr. Miller’s address, “Economic Aspects of Inter-American Relations,” delivered at Boca Raton on December 6, 1950, are printed in Department of State Bulletin, December 25, 1950, p. 1011.

    The decision made by the U.S. Government on December 16, 1950, to request of the CO AS a Meeting of American Ministers of Foreign Affairs, was stimulated in part by the economic mobilization program announced in President Truman’s radio address of the previous day. (“The National Emergency,” ibid., p. 999) Documentation pertinent to this Meeting, held in Washington March 26–April 7, 1951, will appear in a forthcoming volume of Foreign Relations.